Sport Finance

1
Taxes, Antitrust, and Competition Policyin
Professional Sport

• Sport Finance

2
Taxes, Antitrust, and Competition Policy

• Anyone who quotes profits of a baseball club is
  missing the point. Under generally accepted
  accounting principles, I can turn a 4 million
  profit into a 2 million loss, and I can get
  every national accounting firm to agree with me.
• Paul Beeston, Toronto Blue Jays Vice President.

3
Overview

• Sports team owners enjoy special tax and
  antitrust advantages not enjoyed by other
  industries.
• Owners and players enjoy the benefits of this
  special status while fans and taxpayers pay the
  costs.
• The rational actor model helps explain why owners
  enjoy these benefits.
• It is unlikely that this special status will be
  appreciably changed, given collective action
  constraints.
• A competition policy can play an important role
  in fixing market power problems in pro sports.

4
Introduction

• the apparent irrationality of even the worst
  sports investment is largely explained by the
  effects of the full utilization of the available
  tax benefits.
• -Economist Benjamin Okner

5
The Special Tax Status of Owners

• At purchase, new owner organizes team as a
  Subchapter S corporation which treats owners as
  partners and passes-through benefits to
  individuals.
• Results
• The player roster depreciation is in effect.
• Millions of dollars in savings are passed through
  to the owners 1040 Form.
• If owner keeps the team after the roster
  depreciation runs out, he can reorganize as a
  standard corporation, pay the lower corporate tax
  rate, never pay back the tax shelter.

6
The IRS Accommodates MLB

• Tax Reform Act of 1976 50 roster depreciation
  allowance over 5 years.
• Tax Reform Act of 1994 100 depreciation over
  15 (max) years.
• Owners can sell to new owners and start the
  process over (if IRS does not claim excess
  depreciation - could be new roster)

7
Capital Gains Advantages

• When the owner benefits of roster depreciation
  and capital gains are incorporated in sales
  price, franchise prices (all sports) rise (as
  they indeed have.)
• For new owners, there is a risk that the IRS
  would rule that excess depreciation was taken.
• However No excess depreciation ruling ever in
  pro sports!

8
Impact on Capital Gains Per Se

• If the team is sold at higher than the price
  paid, capital gains tax is due.
• If the capital gains tax lt the personal tax rate,
  a lower tax bill is due and paid on capital gains
  despite the fact that the owner enjoyed the tax
  shelter.
• Some of the shelter would have been paid at the
  higher personal tax rate without the shelter.
• Rate of return on franchises gt normal

9
Special Antitrust Status

• The antitrust laws dictate that firms cannot
  legally exercise or extend their market power to
  restrain trade.
• The Federal Trade Commission monitors compliance
  and the Department of Justice prosecutes
  offenders.
• Pro sports leagues are not held to the same
  standard as other industries under the law. MLB
  is exempt.
• Example Owners acting together as a league to
  determine team location and moves. (To some
  degree also true for player movement)

10
Players and Antitrust

• In the modern free agent context of pro sports,
  antitrust still matters though not much.
• Players sacrifice individual rights to sue under
  the antitrust laws when unions represent them.
• The Curt Flood Act (1998)
• As in all other pro sports leagues, MLB players
  now can sue if owners stymie collective
  bargaining using tactics illegal under the
  antitrust laws but many exemptions.
• Decertification still remains a tool to allow
  players to sue individually under the antitrust
  laws. Not used because it can be controlled by a
  few players (e.g., NBA in late 1990s.)

11
Why is valuation important?

• Acquisitions price setting
• Borrowing money
• Expansion fees based on market values of existing
  teams
• Forbes publishes valuations of all clubs of the 4
  major leagues and leading soccer clubs each year

12
Franchise Moves and Antitrust

• The antitrust laws have been used against leagues
  to allow teams freer movement between locations
  (the Raiders case).
• 75 majority vote of owners required for any move
• 100 needed to move into occupied market
• Why do leagues control team location? To protect
  franchise fees.
• Congress despite repeated hearings has never
  intervened directly to reduce owner restraint of
  trade.

13
Broadcasting and Antitrust

• Nothing requires leagues to negotiate the
  broadcast agreements on behalf of their member
  owners. But they do, presumably to the benefit
  of owners.
• Originally, DOJ claimed league contracting
  violated antitrust laws.
• Congress reversed this ruling with the Sports
  Broadcasting Act of 1961 that made it explicitly
  legal.
• Supreme Court would not allow NCAA same
  privileges. This seems a curious distinction.

14
Mergers and Antitrust

• Mergers typically are carefully reviewed by the
  FTC and often denied. (e.g., ExxonMobil)
• Just the opposite has occurred in pro sports.
  Either no intervention or outright facilitation
  often with the blessings and help of Congress
• Formal exemption of the AFL-NFL merger in 1966.
• Outcome of the merger Stopped the competition
  for players
• Other mergers
• NBA ABA
• NHL WHA

15
Special Status Impacts

• Special tax and antitrust status impacts the
  welfare of
• Fans and taxpayers.
• Media providers.
• Owners and players.
• Team sale prices.

16
Impacts Fans and Taxpayers

• Special antitrust status reduces scrutiny
  facilitates market power for team owners
  leagues. Fans pay higher prices and enjoy fewer
  sports events.
• All of the value of increases in fan
  willingness-to-pay accrue to the current group of
  team owners.
• Special tax status, with tax breaks for some
  owners and the bill paid by all taxpayers, leads
  to spending increases.
• Property taxes depreciation-driven shelters.
• All subsidies either require lowered other
  expenditures, higher taxes, or borrowing.

17
Impacts Media Providers

• Media providers must negotiate with the league
  rather than with individual owners. This reduces
  their bargaining position and raises prices.
• A portion of this higher price is passed on to
  advertisers, but not all.
• Media providers enjoy lower profits as a result.

18
Impacts Owners and Players

• Owners and players are the clear beneficiaries.
• Owners enjoy the benefits of enhanced market
  power.
• Players earn a portion of that through collective
  bargaining.
• Owners clearly win from special status.
• Team sale price rises.

19
Impacts Team Sale Prices

• Sale prices are high. In each league, the
  majority of teams sell for more than
• NFL- 370 million MLB- 210 million
• NBA- 207 million NHL- 148 million
• But even more insightful, their values have risen
  at rates greater than the rate of return on a
  diversified portfolio.
• Rates of return

20
Rational Actor Politics Explanation

• Consider special antitrust (or tax) status as an
  example
• Owners and politically powerful supporters
  influence the electoral chances of those choosing
  antitrust policy (Congress). They enjoy special
  status due to rational ignorance and political
  logic on the part of the rest of their
  geographical constituency.

21
Competition Policy

• Cartel power sustained by owner influence on
  politicians face reelection
• The rational actor model predicts politicians
  will concentrate benefits on politically-potent
  groups and disperse the costs over all voters.
• Since current special status reflects
  self-interested politicians seeking to stay in
  power, the chances for change are not great.

22
Altering Special Status

• As with the stadium subsidies, special tax and
  antitrust status is a political outcome. And it
  will take altered politics to change the outcome!
• Those interested in altering the outcome must
  become a political force to be reckoned with and
  overcome numerous hurdles including
• Education of voters
• Successful lobbying.
• What tools could alter cartel power of sports
  owners and leagues?

23
Competition Policy Tools Regulation

• Federal agency regulation
• In some industries, in the name of the public
  interest, the federal government intervenes.
• Public-utility style regulation
• Since local taxpayers typically subsidize the
  activity, just as they do in many locations with
  water and power, public-utility style regulation
  might bring owner behavior in line with fan
  welfare.
• Outright government ownership (fan ownership)
• The public also owns outright water and power
  production facilities. Perhaps a similar
  approach in sports would produce a better result
  from the perspective of taxpayers.

24
Competition Policy Tools Antitrust

• Breaking up the sports leagues
• Suppose leagues were returned to their
  pre-merger status with competing leagues. What
  would we expect? Fort conjectures
• More sports at lower price.
• TV contract prices would fall.
• Competitive balance would be enhanced.
• Highly likely that player salaries would fall.
• No cause for labor-management conflict.
• The end of free agent franchises.
• Some reduced quality in larger markets.